Starbucks. PESTLE and Porter five force analyses - Assignment Example

?Strategic Management Analysis Table of Contents Introduction 3 TASK A – Market Environment Analysis 3 PESTLE Analysis 3 Porter Five Force Analysis 5Critical Success Factors 8 TASK B - Starbucks Strategic Analysis 9 Resources, Capabilities, and Core Competencies 9 Value Chain Analysis 10 VRIO Framework 12 TASK C - Strategic Fit Analysis 12 References 14 Introduction Starbucks is a coffeehouse chain which is based in Seattle, Washington. It has approximately 20,366 stores in about 61 countries, so this makes Starbucks one of the biggest coffee house companies. Starbucks was founded by Jerry Baldwin, Zev Siegl, and Gordon Baldwin in the year 1971. It sells both cold and hot drinks, salads, sandwiches, snacks, pastries, coffee beans, and also other items like mugs, tumblers, etc. The revenue generated by the company in the year 2012 is $13.29 billion, and the operating income is $1.99 billion. The total number of employees is 149,000 till 2011. Starbucks was also the first to introduce the system of Starbucks Express. Through this system Starbucks can order online, so that when they visit the store their order would be ready for them and they would not have to wait. Even a Starbucks Card Apps was introduced for the iPhones and Android users to make payments online. This study aims at discussing the market environment of Starbucks through the strategic tools such as PESTLE and Porter five force analyses. An evaluation of the critical success factors would also be helpful in assessing the business environment further. In the next section the strategic analysis would be further done in details by identifying the strengths and weaknesses, resources, core competencies and the value chain of Starbucks. Finally the strategic fitness of Starbucks would ascertain the sustainability of the company. TASK A – Market Environment Analysis PESTLE Analysis PESTEL is the macro environmental analysis tool, which is used for scrutinizing the political, economical, social, technological, legal and environmental factors. In this study the in-depth PESTLE analysis of UK would assist in understanding the business environment of Starbucks. Political Factors UK is considered to be one of the most flourishing and powerful countries in the world, so it plays an important role when it comes to discussion of business environment. The present prime minister of UK is David Cameron, who has taken several initiatives in dealing with the ongoing recession and for diminishing the fiscal deficit of the country. Economical Factors Due to the economic slowdown and a decline of 0.8 percent in the growth rate, the rate of job cuts is also increasing in UK. The rate of unemployment was recorded to be 8.1 percent in 2011, and expectation of an increasing unemployment rate was high. It has been projected that by 2012, the unemployment rate would be 8.3 percent, which is the highest in 16 years. So it can be said that the economic conditions would also affect the customers who visited coffee shops and restaurants because the purchasing power of people has decreased. Social Factors The government of the country has to face many challenges for maintaining the stages of public services on recommendation. Since the budget deficits, slowing economic condition and other economic issues, so the authorities were not in a condition to maintain the level of expenditure on the projects associated with social welfare. (Marketline, 2012a, p. 4). In UK people prefer to have coffee more than tea, so though economic conditions are adverse, but people would not change their preference for coffee, which would also benefit Starbucks. Technological Factors UK has the second largest aerospace after US. The manufacturing sector of the country supports about 276,000 employees. The government of UK has also stated that the level of knowledge in science and innovation has increased in the country by 1.9 percent in the year 2004, and it is expected to rise to 2.5 percent by 2014. Even coffee shops in the country are technologically well equipped. It can be understood by analysing the technologically equipped ambience of Starbucks. Legal Factors According to the Journal’s Index of Economic Freedom 2012, Wall Street, UK was ranked 14th freest economy in the world. UK was ranked seventh in the World Bank’s indicator called Doing Business in the year 2012. The government of UK has also planned the labour laws, but several labour policies have been compromised, when UK joined the European Union. The labour laws and the other export laws would be also affected for coffee exports and the workforce working in Starbucks. Environmental Factors UK has formulated dedicated policies and targets under the Kyoto Protocol to minimise carbon footprint emission. These pledges include the reduction of the green house gas discharge by approximately 8 percent by 2012. UK has already cut down the emission rates by 12.5 percent, and is moving forward with the target of 22.0 percent reduction of greenhouse gas emission. Since Starbucks is into sales of coffee and food items, so the company must be careful in reducing the carbon footprints. Porter Five Force Analysis Porter’s five force model is used by the strategic consultants for conducting a quantitative analysis of the industry in which the company is conducting business. This tool is helpful in determining the competitive intensity and the attractiveness of the market. (Rosenhauer, 2008, p. 6-8; McGuigan, Moyer, and Harris, 2010, p. 342-344). The elements of porter’s five forces are discussed below: Buyer Power The major distribution channel in UK for the hot drinks like coffee is the supermarkets or the hypermarkets. This contributes about 79.7 percent of the total market. As the size of the market is large, so the supermarket chains negotiate strongly with the market players for price. This in turn also boosts the power of the buyers. Product differentiation possibilities in this market are available in terms of blend or flavours. However, the product range of each company is large, so it might be similar in category. The low cost of switching and the low differentiation of products might further boost the power of the buyers. It can be stated that the overall buying power of the consumers in the hot drinks industry of UK is moderate, as can be seen in Figure 1 Figure 1 Source: (MarketLine, 2012b) Supplier Power The suppliers of the products like coffee, tea or any other form of beverages are the coffee bean and tea growers from African and Asian countries. Tea is sold through auction and also through private sales. As the economic status of the suppliers in these countries are low, so the product found in these countries are highly undifferentiated and there are innumerable number of independent growers. The multilevel supply chain of large coffee retailers is complemented with inclusion of middle men decreases earning potential of individual farmer. Overall, supplier power in UK hot drinks market can be estimated as low-medium, as can be seen in Figure 2. Figure 2 Source: (MarketLine, 2012b) Threat of New Entrants The coffee houses in UK try to differentiate their offerings through adding health benefits, providing differentiated taste, and by offering high quality coffee beans. The cost of switching is low for the customers that increase the opportunity for the new players in the market. However, Starbucks have high level of goodwill and brand equity, so it might be a barrier for the new entrants. The major players in the market cover the majority of market share, so it might be difficult for the new entrants to gain advantage in the market. Brands like Starbucks offer wide range of products, which is difficult for new companies to offer. So the threat of new entrant is moderate in the country, as can be seen in Figure 3. Figure 3 Source: (MarketLine, 2012b) Threat of Substitutes Coffee and tea is the generally consumed hot drinks in UK. Coffee has a cultural heritage in the country and it is preferred over tea. So the threat of substitute is weak, as can be assessed from Figure 4. Figure 4 Source: (MarketLine, 2012b) Degree of Rivalry The hot drink market in UK is highly fragmented, due to the present of major players which cover 40.2 percent of the market. The switching cost is low and there is less scopes of product differentiation, so the degree of rivalry is strong and it also provides an opportunity to the major players to cannibalize the market share of other players by offering products at low cost. Further the entry of luxurious coffee brands like Lavazza and Senseo has increased the rivalry in the market. So the rivalry for UK hot drinks market can be termed as high-medium, as can be analysed from Figure 5. Figure 5 Source: (MarketLine, 2012b) Critical Success Factors Critical Success Factors (CSF) is the elements that are required for the organisation to achieve their mission. These factors are critical or essential for the success of the business or the organisation. This term is generally used in case of data analysis or business analysis. The critical success factors of Starbucks are discussed below: Critical Success Factors (CSF) Application in Starbucks Technology CSF Online presence through social media networking, websites, and advertisements. Starbucks online apps for payment of bills, etc. Distribution CSF Strong and sustainable relationship with the suppliers and distributors. Expansion of business through opening up new coffee shops and internet stores. Service CSF Maintaining high quality of products and services. Treating customers warmly. Marketing CSF Increasing the length and breadth of the product line. Promoting Starbucks as a brand name for high quality coffee. Capabilities and Skill CSF Introduce innovative product through differentiated taste. Offering personalized services to customers. Other CSF Stores should be located at convenient locations. Venture into new markets such as Asian countries like India, and many African countries (Gamble and Thompson, 2011). TASK B - Starbucks Strategic Analysis Resources, Capabilities, and Core Competencies The assets of the company are regarded as the resources. Resources are generally segregated into two parts tangible resources and intangible resources. Tangible resources are the physical entities of the company such as land and building, equipment, money, plant, etc. Intangible resources are goodwill, online presence, etc. IN case of Starbucks its tangible resources are its stores, warehouses, and employees, while the intangible resources are its IT framework, brand equity and goodwill, relationship with suppliers, websites and social media networking channels (Longenecker, Petty, Palich, and Hoy, 2011, p. 85-86). Capabilities on the other hand are the strategies and the skill of the company to utilise the available resources and make productive use of them. Capabilities are always intangible and the human resource of the company is responsible for utilising their skill and expertise to generate core competencies for the company (Hill, and Jones, 2011, p. 173-174). Starbucks can utilise its tangible resources to expand its business by exploring many untapped market and opening new stores. The financial investments can also be utilised to support new venture rather than increasing spending on saturated markets like USA. Starbucks has decided to close down 300 stores in USA and expand in other countries (Miller, 2009). The human resource can be further training to provide better services to customers. The intangible resource such as technology can be utilised to increase the online present of Starbucks as a brand. Word of mouth advertisement or viral marketing is preferred nowadays because majority of youngsters are present online for most of their time, so higher visibility will lead to increase in brand equity. Starbucks’ core competency is its high quality coffee and coffee bean. Other than coffee, the products which are derivation of coffee and tea are equally good. Moreover, the ambience in which the coffee is served at Starbucks is also appreciated by the customers (Hill, and Jones, 2012, p. 84-85). Value Chain Analysis Value Chain Analysis The value chain of the company is segregated into primary and supporting activities. The Primary activities consist of a) outbound and inbound sales, b) Operations, c) Marketing and Sales, and d) Services. The supporting activities are a) Procurement, b) Technology development, c) Human Resource Management, and d) Infrastructure (Hitt, Ireland & Hoskisson, 2010, p. 86). Primary Activity Inbound and Outbound Logistics: The products of Starbucks are mainly sold through the coffeehouses or stores, and it was not separately sold in departmental stores or supermarkets. However, it has been seen that the supermarkets are selling Starbucks coffee beans and other Starbucks’ products. The inbound logistics are the coffee manufacturers and their agents, intermediary and the supply chain system. Operations: Starbucks has about 6,705 company owned stores and about 4,082 stores that are licensed in USA. However, since the US market has become saturated, so Starbucks has planned to close down 300 of its stores in USA and planning to open 900 more stores in other parts of the world (Starbucks, 2012; Miller, 2009). The operational functions of the company is conducted through these company owned and licensed stores. Marketing and Sales: Starbucks does not invest much in advertisement, promotion or marketing activities, as it believes that word-of-mouth advertisement best works for them. Starbucks presents themselves as high quality coffee shop for those who would pay a reasonably higher price for good ambience and high quality coffee and food. Services: Services also play an important role in Starbucks. Just serving coffees is not the motive, but to offer friendly services and satisfaction to the customers is also necessary Supporting Activity Procurement: Procurement in Starbucks is mainly related to obtaining raw materials such as coffee beans, tea, etc. Apart from this the procurement of machineries, human resources and property for launching new stores is also necessary. Technology development: Starbucks utilizes technologically advanced machineries for offering best services and high quality products to customers. Apart from this, Starbucks has also made good use of internet and launched mobile apps, etc. Human Resource Management: Starbucks considers its workforce to be the most valuable resource. It introduces wide range of programs for the training and development of the employees. Several appraisal programs are also floated to motivate the employees from time to time. Infrastructure: Starbucks have its own coffee houses or stores around the world which the company procures with the help of the government and other legal support. Starbucks has its own signature style and the infrastructure in terms of its architecture and design are similar all around the world (Moore, 2010, p. 90). VRIO Framework Valuable Rare Difficult to Imitate Exploited by the Other Firms Premium Coffee Yes Yes Yes Yes Fund/Capital Yes Yes No No Research and Development Capabilities Yes Yes Yes Yes Skilled Workforce Yes Yes Yes Yes Strong IT System Yes No No No Good Relationship with Supply Chain Yes Yes Yes Yes Loyalty Card Yes No No No Brand name Yes Yes Yes Yes TASK C - Strategic Fit Analysis Starbucks has develop several core competencies that has assisted the company to grab the available external opportunities in the speciality coffee industry. The first and the second part of the study include the internal and external environment of Starbucks, critical success factors, internal operational functions and core competencies of the company. So in order to conduct a strategic fit analysis, SWOT analysis would be utilised so as to include the results derived from the analysis and evaluate the strategic fitness of Starbucks. Strengths Weaknesses Starbucks have always tried to infuse innovation and creativity in its product line. This is the reason why Starbucks offer a wide range of beverages, different flavours of high quality coffee, gourmet snacks, food items, tea, coffee, etc. Second, Starbucks is opening up large number of stores in made new markets. This proves that Starbucks is going to leave its mark soon in every parts of the world. Third, the company also possess strong financial condition. The revenue of Starbucks is growing at a pace of 8 percent. Last, Starbuck has strong brand equity. The pricing policy of the company can be considered its first weakness because the products in Starbucks are quite costly which hinders majority of the coffee drinkers from visiting Starbucks. The company is mainly US focused, so majority of its stores are in USA. However, Starbucks is not much present in the largest markets of the world such as in many Asian and African countries. The company also does not spend on marketing or promotional activities which is surely a setback for Starbucks because commercialization is very important in today’s competitive business environment. Opportunities Threats The increasing demand of coffee stores is indeed new opportunities for Starbucks. Moreover, due to free trade and commerce among nations, it has become easier to procure raw materials. Starbucks is also taking initiative to explore the new untapped markets. Pressure from the domestic markets where Starbucks is conducting business is increasing. Moreover, the taste and preferences of the customers are ever changing. Also the economic slowdown and recession would also have a negative impact because the purchasing power of customers has reduced, so their preferences for high priced beverages have gone down too. References Gamble, J. E. and Thompson, A. A., 2011. Essentials of Strategic Management. New York, Irvin: McGraw-Hill. Hill, C. W. L., and Jones, G. R., 2011. Essentials of Strategic Management. 3rd ed. Connecticut: Cengage Learning. Hill, C. W. L., and Jones, G. R., 2012. Strategic Management: An Integrated Approach. 10th ed. Connecticut: Cengage Learning. Hitt, M. A., Ireland, R. D., and Hoskisson, R. E., 2009. Strategic Management: Concepts & Cases. Connecticut: Cengage Learning. Longenecker, J. G., Petty, W., Palich, L. E., and Hoy, F., 2011. Small Business Management: Launching & Growing Entrepreneurial Ventures. 16th ed. Connecticut: Cengage Learning. MarketLine, 2012a. United Kingdom In-Depth PESTLE Insights. Company Profile Series, pp. 1-78. MarketLine, 2012b. Hot Drinks in the United Kingdom. Industry Profile Series, pp. 1-38. McGuigan, J. R. R., Moyer, C., and Harris, F. H. D., 2010. Managerial Economics. 12th ed. Connecticut: Cengage Learning. Miller, C. C., 2009. Starbucks to Close 300 Stores and Open Fewer New Ones. [online] Available at: http://www.nytimes.com/2009/01/29/business/29sbux.html. [Accessed 1 December 2012]. Moore, K., 2010. Marketing: The Basics. London: Taylor & Francis. Rosenhauer, Sven. 2008. Profit Is A Wonderful Word. Norderstedt: GRIN Verlag. Starbucks, 2012. Form-10K: Annual Report 2011. [pdf] Available at: [Accessed 29 October 2012]. Read More